Polish companies note a continued but still gradual recovery into the second quarter of this year, but the deepening Russia-Ukraine crisis may blur the positive picture, central bank NBP wrote in a Q1 sentiment report with Q2 forecasts.

Assessment of economic situation deteriorated slightly, which may stem from revisions of overly optimistic assumptions from the previous quarter, as well as from the Russia-Ukraine conflict, which is likely also responsible for a slight deterioration of forecasts for Q2, the report shows.

In Q1 73% of firms assessed their situation as positive (down from 75% in Q1), but the decline was not reflected in surveys of current, future and expected difficulties, NBP researchers wrote pointing to concerns raised by the RU-UA conflict as the reason behind the discrepancy. Uncertainty pertinent to the firms' own situation and their immediate environment declined in Q1 compared to the previous quarter, despite the Ukraine-Russia conflict. Firms do not expect an acceleration of the economic situation in Q2, but forecasts for beyond Q2 improved and the survey indicates that the economic situation should improve significantly near the end of 2014.

Forecasts for credit demand rose slightly from both the prior quarter and prior year period, albeit more on account of a decline in firms planning to pay off debt, as the percent of firms seeking rising financing needs continues to decline.

The report shows that wage hikes in Q2 will on average be smaller than in Q1. Most wage increases will be moderate, up to 5%. Only 4.7% of employees will see wage increases higher than 5%, while only 0.7% of employees will see raises of at least 10%.

Employment forecasts improved significantly year on year and remained similar to Q1 forecasts. More companies intend to increase employment than to reduce staff in Q2 for the second quarter in a row (some 12.7% versus 10%).

Exporters reported a slight deterioration of their situation in Q1 and a decline of export margins, but forecasts for exports beyond Q2 improved for exporters as a whole, including for food firms, which lowered export forecasts in the near-term perspective due to higher uncertainty on markets East of Poland.

Forecasts for demand edged down slightly after three quarters of strong improvement and are now near the long-term average.

Companies are planning to launch more new investment projects Q2 than Q1, but outlays will rise more slowly in value terms. While the number of companies planning new investments in the coming three months has risen for the third quarter in a row, forecasts of a significant rise in outlays have fallen for the first time since early 2013. Slowdown in investment recovery may be tied to adjusted views on expected demand, orders, exports or assessment of the general situation as well as new risks stemming from the Ukraine-Russia conflict.